|
August 10, 1990
The armflapping panic on Wall Street is winding down, and so are interest rates. If a lemming were to judge the Street's performance, he would give it a 10.0 for form.
This morning's July Producer Price Index report was a surprise decline of .1%. This is the last good inflation number until higher oil prices wash through the system. The jump in interest rates this week has far more to do with an old villain, the budget deficit, than with oil prices or war fears.
There was legitimate fear for oil prices only so long as Iraq might have invaded Saudi Arabia, and blown the oil fields there. That risk is gone, now. The loss of 4 million bbl/day from Kuwait and Iraq has already been made up by OPEC, and can be withstood for years.
Oil prices peaked at $28/bbl, and are back to $24/bbl at week's end. The average for the last few years has been around $17/bbl. This isn't much of an oil shock compared to the real ones: 197374 ($3/bbl jumping to $15/bbl) or 198081 ($18/bbl to $38/bbl).
Hysterics aside, with American troops in Saudi Arabia, and a Soviet naval squadron assisting an American fleet, oil supplies have not been so safe in twenty years. Hats off to the best crisis management by a president since WWII. The principal damage to interest rates was done by this week's quarterly auction by the Treasury ($35 billion in new cash this week to finance the budget deficit). The bond market has had a bad time during these auctions for years; even with war and inflation fears, this week's auction was no worse than the rest.
A budget deal will be harder to cut, as some of the peace dividend will be semipermanently redeployed in the Persian Gulf.
However, a pending recession will soon dominate the bond market again. $24/bbl oil will tend to reinforce the recession more than add to inflation.
As your clients will be a tad confused about the markets, try to help them keep the bond market (mortgages) separate from the stock market (lunatics) and the prime rate (banks). Bonds have a chance to improve (mortgages back into single digits), while stocks may have a bad time for a year, and prime will probably fall faster and farther than mortgage rates. One cranky editorial note. Americans seem much more worried about oil companies profiteering for a dime at the pump than concerned for 19 yearold paratroopers who may soon die to protect unreasonably cheap gas.
|
